When does a carbon tax on fossil fuels stimulate biofuels?

A carbon tax is an efficient economic instrument to reduce emissions of carbon dioxide released from fossil fuel burning. If designed properly, it could also help significantly to promote renewable energy. Using a multi-sector, multi-country computable general equilibrium model this study investigates under what circumstances a carbon tax would help stimulate penetration of biofuels into the energy supply mix for road transportation in various countries and regions around the world. This study shows that a carbon tax cum biofuel subsidy policy, where a carbon tax is introduced to fossil fuels and part of the tax revenue is used to finance the biofuel subsidy, would significantly help stimulate market penetration of biofuels. On the other hand, a carbon tax alone policy, where the entire tax revenue is recycled to households through a lump-sum transfer, does not help stimulate biofuels significantly even at higher tax rates. Although the carbon tax cum subsidy policy would cause higher loss in economic output at the global level as compared to the carbon tax alone policy, the incremental loss is relatively small. The key policy insight drawn from the study is that if a carbon tax were to be implemented in an economy for the purpose of climate change mitigation, recycling part of its revenue to finance biofuel subsidies would significantly help stimulate biofuels.     

Interfuel substitution effects of biofuel use on carbon dioxide emissions: evidence from the transportation sector

This study examines the interfuel substitution effects of biofuel use on carbon dioxide emissions in the U.S. transportation sector. First, the dynamic linear logit model is used to examine substitution possibilities between biofuels and non-biofuels. The results reveal that petroleum demand is the most inelastic with respect to changes in petroleum prices since the transportation sector depends heavily on the use of petroleum. In addition, ethanol serves as a substitute for petroleum, showing that the use of ethanol can reduce the dependence on petroleum when petroleum prices increase. The results also indicate that ethanol is a complement for natural gas, while natural gas is a substitute for petroleum. Second, the coefficients for carbon dioxide emissions are used to compute the potential amount of carbon dioxide associated with interfuel substitution. The results represent that price-induced interfuel substitution is a critical factor to predict biofuel-related carbon dioxide emissions.     

An integrated tax-subsidy policy for carbon emission reduction

A carbon tax is often cited by economists as an effective instrument to mitigate greenhouse gas emissions, but there is little political interest in the United States. In light of this political unpopularity, we develop and examine a net-revenue constrained carbon tax and subsidy program. The optimal revenue constrained tax and subsidy schedule based on our utility maximization model taxes energy sources with high emissions to energy price ratio, and subsidizes sources with low emissions to energy price ratios. This approach may be more palatable than a traditional carbon tax because it can change the relative price of low and high emissions energy sources while providing a mechanism to limit net tax increases and energy price increases. We find that a constrained tax/subsidy program provides welfare gains relative to a no-tax scenario. Welfare gains are estimated to be 1% and 36% of the welfare gains from a Pigouvian tax for the motor fuels industry and electric power industry, respectively. In contrast, subsidies for low-emitting energy sources funded from general tax funds rather than from high-emission energy tax revenues lead to welfare decreases substantially below our proposed tax/subsidy policy approach.     

On the potential economic costs of cutting carbon dioxide emissions in Portugal

The objective of this paper is to estimate the impact of reducing carbon dioxide emissions from fossil fuel combustion activities on economic activity in Portugal. We find that energy consumption has a significant impact on macroeconomic activity. In fact, a 1 ton of oil equivalent permanent reduction in aggregate energy consumption reduces output in the long term by €6,340. More importantly, and since carbon dioxide emissions are linearly related to the amounts of fuel consumed, our results allow us to estimate the costs of reductions in carbon dioxide emissions. We estimate that a uniform standard for reducing carbon dioxide emissions from fossil fuel combustion activities would lead to a marginal abatement cost of €95.74 per ton of carbon dioxide. This is a first rough estimate of the potential economic costs of policies designed to reduce carbon dioxide emissions. At this level one may conclude that uniform, across the board reductions in carbon emissions would have a clear negative effect on economic activity. Hence, at the aggregate level there is clear evidence for a trade-off between economic performance and a reduction in carbon emissions. This opens the door to the investigation of the scope for policy to minimize the costs of environmental policy and regulation.     

Swedish CO<Subscript>2</Subscript> Emissions 1993–2006: An Application of Decomposition Analysis and Some Methodological Insights

This study undertakes a decomposition analysis to identify the drivers of carbon dioxide emissions change in the Swedish business and industry sectors 1993–2006. On aggregate, energy intensity decreased, but this does not seem to have been very important for reducing emissions. Rather, fuel substitution seems to have been more important, which is in line with findings from the decomposition literature on Sweden. However, at the sectoral level, we find no clear pattern of the effect of fuel substitution and energy intensity on emissions. We also draw some methodological conclusions: decomposition analysis should be undertaken at the most disaggregate level possible; assessing decomposition results by summing results over several time periods leads to biased results; and decomposition analysis should not be based only on some initial and final years of a long time period. Furthermore, we address the problem of double counting energy flows in decomposition analysis of aggregate effects when the energy sector is included, and point out potential problems related to output measured in monetary terms.     

AGE analysis of the impact of a carbon energy tax on the Irish economy

A computable general equilibrium model with specific detail in taxation and energy use is developed in this paper to quantify the impact of the implementation of energy taxation to reduce carbon dioxide emissions in Ireland. Benchmark data combining physical energy and emissions data and economic data in the form of a Social Accounting Matrix (SAM) had to be compiled from various data sources, because energy and pollution accounts from the SEEA are not available for Ireland. We find that the reduction target for energy related CO₂ emissions in Ireland of 25.8% compared to 1998 levels can be achieved with a carbon energy tax of 10-15 euros per tonne of CO₂. Though fuel switching is important in meeting the target, this result is more sensitive to the possibilities for producers to substitute away from energy use. Welfare would fall but only by small percentages. Production and consumption patterns would change more significantly, with a shift in demand from fuels with a high emission factor to energy sources with a lower carbon-intensity and from energy to other commodities. This paper confirms that a carbon energy tax leads to greater emission reductions than an equivalent uniform energy tax. The latter has a stronger negative impact on the less polluting energy sectors whereas the carbon tax greatly stimulates the use of renewable energy and reduces the use of peat and coal. The new SAM, the model and the application to energy taxes contribute to a better informed debate on environmental policy in Ireland.     

Race to burn the last ton of carbon and the risk of stranded assets

A cap on global warming implies a tighter carbon budget which can be enforced with a credible second-best renewable energy subsidy designed to lock up fossil fuel and curb cumulative emissions. Such a subsidy brings forward the end of the fossil fuel era but accelerates fossil fuel extraction and global warming in the short run. A weaker fossil fuel oligopoly implies that anticipation of a given global carbon budget induces fossil producers to deplete reserves more voraciously and accelerate global warming. This race to burn the last ton of carbon is more intensive for the feedback than open-loop Nash equilibrium, so that the Green Paradox effect of a renewable energy subsidy is stronger. There is an intermediate phase of limit pricing to keep renewable energy producers at bay, which becomes much more relevant when a cap on global warming is enforced. A stronger fossil fuel oligopoly lengthens the period of limit pricing and typically brings forward the carbon-free era. Finally, the mere risk of a cap on global warming being enforced at some unknown, future date makes fossil fuel extraction more voracious and accelerates global warming.     

碳税的产业竞争力效应分析

如何在减排的同时更好地促进我国经济发展,已成为一个亟须解决的问题。碳税是减少碳排放的一种重要手段。碳税开征与否的一个主要争论在于:征收碳税是否会影响产业竞争力。在制定碳税政策时,需要考虑碳税实施后对产业竞争力产生影响的可能性及程度,采取相应补偿措施,实现节能减排的目的。     

Effects of Carbon Dioxide Control Policy in China by Multi-Regional CGE Model

In recent years, China has faced tremendous pressure to reduce carbon dioxide emissions. At the COP 15 United Nations Climate Change Conference in Copenhagen in 2009, China committed itself to achieve a 40%–45% per GDP carbon dioxide emission reduction in the near future. To reach this goal, China is willing to adopt a series of new policies, including attempts to introduce a carbon tax, and to start an energy-resource-tax pilot program in the western provinces. For this research, we constructed a Multi-Regional Computable General Equilibrium model. Then we used six scenarios to evaluate the economic effects and effectiveness of energy-resource tax policy for control of carbon dioxide emissions for different regions of China. The main result of this research is the finding that an ad valorem energy resource tax can reduce carbon dioxide emissions in China. At the same time, fiscal policy might engender different effects in different regions of China. Additionally, this policy is more efficient for controlling petroleum and natural gas resources than it is for coal resources.     

Reducing Greenhouse Gas Emissions in the Queensland Electricity Supply Industry: Gas and Carbon Tax Scenarios

This article examines various greenhouse gas scenarios for the electricity supply industry in the coal‐rich state of Queensland. The authors use a dynamic partial equilibrium model of the Queensland electricity system to examine the effects of four alternate policy scenarios: a business‐as‐usual case, a centrally planned gas‐fired case, and two carbon tax scenarios– the first in which the merit order of coal and gas plant is reversed, and the second in which fuel switching is undertaken. The results indicate that no scenario is capable of delivering sufficient cuts in emissions to meet a ‘Kyoto equivalent’ industry target. While fuel switching brought about the greatest reduction in emissions, the high cost of this scenario indicates that a more efficient outcome for the electricity supply industry in Queensland would be a broad‐based Australia‐wide approach to emissions abatement, so that carbon reductions can be accessed from industries capable of achieving lower cost emissions abatement.     

Climate Change Taxes and Energy Efficiency in Japan

In 2003 Japan proposed a Climate Change Tax to reduce its CO₂ emissions to the level required by the Kyoto Protocol. If implemented, the tax would be levied on fossil fuel use and the revenue distributed to encourage the purchase of energy efficient equipment. Analysis using the MIT Emissions Prediction and Policy Analysis (EPPA) model shows that this policy is unlikely to bring Japan into compliance with its Kyoto target unless the subsidy encourages improvement in energy intensity well beyond Japan’s recent historical experience. Similar demand-management programs in the US, where there has been extensive experience, have not been nearly as effective as they would need to be to achieve energy efficiency goals of the proposal. The Tax proposal also calls for limits on international emission trading. We find that this limit substantially affects costs of compliance. The welfare loss with full emissions trading is 1/6 that when Japan meets its target though domestic actions only, the carbon price is lower, and there is a smaller loss of energy-intensive exports. Japan can achieve substantial savings from emissions trading even under cases where, for example, the full amount of the Russian allowance is not available in international markets.     

Green monetary and fiscal policies: The role of consumer preferences

We establish a two-sector model to simulate the potential effects of green fiscal poli- cies and unconventional green monetary policy on the economy during a recovery or in case of a stimulus policy. We find that instruments such as a carbon tax, an implicit tax on brown loans, and a subsidy for the purchase of green goods are all beneficial to the green sector, in contrast to green quantitative easing. A carbon tax imposed directly on firms in the brown sector is the most effective tool to reduce pollution. More importantly, the marginal effects of green instruments on the economy depend on consumer preferences. Namely, the marginal effects are the most prominent when consumers start to purchase more green goods as an increasing part of their consumption basket. Furthermore, the effects of those green policies are more effective when the elasticity of substitution between green and brown goods increases. This finding suggests that raising consumers’ awareness and ability to consume green goods reinforce the effectiveness of public policies designed for low-carbon transition of the economy.     

How should environmental policy respond to business cycles? Optimal policy under persistent productivity shocks

How should environmental policy respond to economic fluctuations caused by persistent productivity shocks? This paper answers that question using a dynamic stochastic general equilibrium real business cycle model that includes a pollution externality. I first estimate the relationship between the cyclical components of carbon dioxide emissions and US GDP and find it to be inelastic. Using this result to calibrate the model, I find that optimal policy allows carbon emissions to be procyclical: increasing during expansions and decreasing during recessions. However, optimal policy dampens the procyclicality of emissions compared to the unregulated case. A price effect from costlier abatement during booms outweighs an income effect of greater demand for clean air. I also model a decentralized economy, where government chooses an emissions tax or quantity restriction and firms and consumers respond. The optimal emissions tax rate and the optimal emissions quota are both procyclical: during recessions, the tax rate and the emissions quota both decrease.     

Equity,externalities and energy subsidies The case of kerosine in Indonesia

This paper examines two arguments used to justify the subsidy provided kerosine, the primary commercial fuel of Indonesian households. One argument holds that the subsidy reduces deforestation externalities resulting from wood gathering. Econometric analysis of a large cross-section of households finds that firewood/kerosene substitution is very limited in Java, where the deforestation problem is most severe, so that kerosene subsidy is not an effective means of alleviating the problem. The second argument holds that social equity requires the subsidization of ‘basic needs’ such as kerosene. It is found that the kerosene subsidy disproportionately benefits urban and wealthier households.     

基于可计算的一般均衡模型的我国碳税政策“双重红利”研究

建立了分析我国减少二氧化碳排放而征收碳税的可计算的一般均衡模型,分析碳税政策的双重红利。结果显示:为减少二氧化碳排放而征收碳税,对社会经济变量将造成一定的负面影响。保持财政中性,在征收碳税的时候,减少居民或者企业间接税,都可以在减少二氧化碳排放量的同时提高社会福利或者保持社会福利变化不大,实现碳税的双重红利。但是在保持财政中性,在征收碳税的同时减少企业所得税,虽然减少了二氧化碳排放量,居民的社会福利却有了更大程度的下降。     

How do market reforms affect China's responsiveness to environmental policy?

A large percentage of total investment in China is allocated by the central government at below-market interest rates in pursuit of non-economic objectives. This has resulted in low rates of return and a high number of non-performing loans, threatening the future health of the Chinese economy. As a result, reform of capital markets is a high priority of the Chinese government. At the same time, the country is implementing various environmental policies to deal with serious pollution issues. In this paper we ask how reforms of the capital market will affect the functioning of a carbon tax. This allows us to assess how China's willingness to join global efforts to reduce carbon emissions is influenced by China's current efforts to reduce investment subsidies. We compare the costs of a carbon tax in a reformed economy with the costs of a carbon tax in the current subsidized economy. We find that in the subsidized economy the tax-interaction effect dampens the effect of a carbon tax resulting in smaller reductions in emissions than what would result in a reformed economy. Importantly, we also find that the effect on economic welfare from a carbon tax is lower in the subsidized economy; in fact, for lower levels of reductions, the carbon tax is actually welfare improving. These results have important implications for an economy undergoing economic transition. The carbon tax rate required to achieve a certain level of emission reductions will be higher in an economy with capital subsidies. However, the welfare implications of the tax indicate that the current system with capital subsidies is highly distorting implying that there is a high efficiency cost for the non-economic objectives the government is pursuing by maintaining this system of subsidies.     

International Cooperation on Climate-friendly Technologies

We examine international cooperation on technological development as an alternative to international cooperation on emission reductions. We show that without any R&D cooperation, R&D in each country should be increased beyond the non-cooperative level if (i) the technology level in one country is positively affected by R&D in other countries, (ii) the domestic carbon tax is lower than the Pigovian level, or (iii) the domestic carbon tax is set directly through an international tax agreement. We also show that a second-best technology agreement has higher R&D, higher emissions, or both compared with the first-best-outcome. The second-best subsidy always exceeds the subsidy under no international R&D cooperation. Further, when the price of carbon is the same in the second-best technology agreement and in the case without R&D cooperation, welfare is highest, R&D is highest and emissions are lowest in the second-best R&D agreement.     

Junk-food,home cooking,physical activity and obesity: The effect of the fat tax and the thin subsidy

In an effort to reduce the growing prevalence of obesity, a tax on junk-foods, known as ‘fat tax’, has been proposed, the revenue from which could be used to finance a ‘thin subsidy’ for healthy foods or exercising equipment. The present paper addresses the fat tax and thin subsidy within a food-intake rational-choice model. Assuming that healthy meals are cooked at home with purchased ingredients and time input, the paper examines the effects on obesity of a tax on junk-food meals and a subsidy to cooking ingredients, distinguishing between a weight-conscious and a non-weight conscious individual, and between a weight-conscious individual who is physically active and physically inactive. The results show that for a non-weight conscious individual a fat tax will unambiguously reduce obesity, whereas a thin subsidy may increase obesity. However, for a weight-conscious individual, particularly one who is physically active, even a fat tax may increase obesity, as it may reduce not just the consumption of junk-food, but also the time devoted to physical activity. The paper explores conditions under which obesity will rise, fall, or remain intact following the introduction of a fat tax or a thin subsidy.     

The Environmental and Economic Impact of the Carbon Tax in Australia

To fulfil its emission reduction target pledged in the Copenhagen accord, the Australian Government has determined to introduce a carbon tax from July 1st 2012. This paper simulates the effects on the environment and on the economy of a carbon tax of A$23 per tonne of carbon dioxide proposed by the government with, and without, a compensation policy. We employ a computable general equilibrium model with an environmentally extended Social accounting matrix. According to the simulation results, the carbon tax can cut emissions effectively, but will cause a mild economic contraction. Because the price signal is intact, the proposed compensation plan has little impact on emission cuts while significantly mitigating the negative effect of a carbon tax on the economy.     

Environmental Goods and Measures for Their Promotion: An Analysis Using a Fair Wage Model

In this paper, we model a two‐sector small open economy with emissions and unemployment associated with the fair wage effort hypothesis, and investigate the environmental and employment impact of an emission tax, a subsidy for purchasing environmental goods in the downstream polluting industry, and a subsidy to the upstream eco‐industry. We then show that if the eco‐industry is skilled labor intensive relative to the polluting final goods industry, while a subsidy for purchasing environmental goods decreases the unemployment rate of unskilled labor, it may increase total emissions. In contrast, the emission tax and the subsidy to eco‐industry firms worsen the unemployment rate, though both policies decrease total emissions. Hence, if the emission tax is set equal to the marginal environmental damage, and either a downstream or upstream subsidy is used to mitigate unskilled unemployment, the optimal subsidy to purchase the goods is positive whereas the optimal subsidy to the eco‐industry is negative, i.e., a tax on the eco‐industry.